When you say you want to be better at handling your money, what does that mean? The answer to this question depends on the person. It could mean early retirement, higher income, more savings, and a variety of other things. But is financial improvement merely a numbers game? What do you aim for if you’re unclear about how a certain lifestyle will cost? Surely there must be other ways to measure improvement.
Because of this, I prefer to think of financial growth in stages. It doesn’t include a specific net worth amount, nor a minimum income level. After all, there’s no such thing as “one size fits all” when it comes to personal finance. What exists instead are different psychological and emotional stages, and the numbers corresponding to them vary from person to person. What I’m measuring in this case is one’s sense of comfort, freedom, and security which, frankly, is more telling than the numbers themselves.
So what are the different stages of personal finance?
Stage Zero: Ignorance
Why start with zero and not the number 1? Well, because zero is what’s going on here. The idea of handling money hardly makes a blip on your radar. Not to sound too harsh, but stage zero is the stage where you are ignorant about money. That’s okay, everyone starts here.
While you may know about saving or investing, you’re not really doing them. You feel like you should save or at least do something about your money, but this thought soon disappears as you go back to your daily life. You don’t know how much your monthly expenses are, either. If you’re unlucky, you’re already in financial trouble but are vaguely aware of it. If you’re lucky enough to avoid trouble, this is mostly because of chance. Any minor event such as a toothache or “therapeutic shopping” is bound to rock your financial boat.
Stage One: Awareness and Action
Finally, you’ve realized that it’s time to take control of your finances! You start asking around, reading books, and learning all you can about how to do things right. Then, you actually do something with this new information.
If you have debt, you’re creating plans to reduce or eliminate it. At this point you are also forming new habits such as getting your spending under control and managing your money. If a lot of damage has already been done, you may be far from financial stability – but at least you’re taking steps towards it.
Stage Two: Stability
By this time your actions have paid off and you’re taking consistent measures to keep it that way. You have no debt, or if you do, it’s completely under your control. You have an emergency fund that is suited to your needs, and you’re on track when saving or investing for retirement. Your income is also consistent and you spend less than you earn. You may even be sleeping easier.
Stage Three: Freedom
In this stage, you’re earning passive income that’s equal to or greater than your living expenses. You don’t have to rely on your job to live. Where are you getting this passive income? It could be from a business that you’ve invested in but don’t personally run, stock dividends, or the sale of information products (such as ebooks). The only downside is that because of the high level of knowledge, time, or capital needed for this stage, not everyone ends up here.
What stage of personal finance are you in right now? What stage do you hope to be in by the end of the year?
I think I’m at Stage One (Yay!), but I was at Stage Zero three months ago. Still learning and reading about this personal finance thingy!
Good for you!
I hope you’ll reach Stage 2 within the year.
I am somewhere in the middle of stage one and stage two. Most people stop if they reach stage two (which is not so bad). But to be financially secure one must reach stage three to avoid any emergency expenditures.
Your blog could be a wake-up call to those who are contented with stage two.
You’re right, stage three is ideal. The problem is filtering the opportunities. Of course, everyone would probably want passive income if offered to them, the problem is that scams are plentiful.
I hope to refer to this post in the future so I can make stage-specific advice. Tips for people aiming for stage 3 might not be applicable to those currently in stage 0 and vice-versa.
Very nice insights and really easy to read. I’ve been through stage zero and 1 and now transitioning to stage three. I’ll be sharing this to all my friends @ facebook.
I think I’m between Stage One and Stage Two right now.
Wish me luck, ate! (I think you’re older so I’m just assuming.) 
Good luck! Kayang-kaya yan